Lending Standards Have Relaxed. Is This Such a Bad Thing?

If lenders have anything to do with it, the economic recovery could be far from over.

Apr 12, 2014 at 12:12PM

Source: Flickr / Florin Gorgan.

Do you remember just after the financial crisis when it was nearly impossible to get a loan for anything unless you had a fantastic credit score? Well, it appears those days might be over. According to recent data, right now is the easiest time in five years to get a new loan for a home or car. Easier, but responsible, credit will have positive effects on several areas of the economy. Consumer spending, real estate prices, and many corporations all stand to benefit here, so let's take a closer look at what easy credit could mean for you and your investments.

What do we mean by "easier" credit?
Now, credit may seem that it's getting easier to come by, but things are still pretty tight on a historical basis. Before the financial crisis, there were all sorts of  "crafty" loan products that were pretty much there so that anyone could qualify for a house, regardless of their income or credit rating. Does anyone remember the phrase "no-doc loan"? There were lenders offering "zero-down financing with a 575 credit score", even if the borrower was one day out of bankruptcy!


Source: Flickr / Okko Pykko.

Thankfully the shady loan products don't exist anymore, and lenders are relaxing their credit standards in a responsible manner. The notion that everyone should be able to buy a house is a faulty one, but so is the notion that only those with perfect credit will pay a loan back. For instance, the average credit score of consumers who received a mortgage peaked at 750 in 2012, which is universally considered top-tier credit by lenders.  The right way is somewhere in the middle of how things were in 2005 and how they were a few years after, and that's where we seem to be gravitating toward now.

According to bankrate.com, about 27% of U.S. consumers have a FICO score that is between 600 and 700, a range that is mostly considered "near-prime". So, if a certain lender lowers the minimum credit score to buy a new car from 660 to 640, they could be adding more than 5% of the population to their customer base, assuming an even distribution of scores in that range.

More companies benefit from home and car sales than you may think
The most interesting effect of easier credit has to do with the wide variety of companies that can benefit, both directly and indirectly. Direct beneficiaries will be the banks, who will be making more loans, as well as the auto companies and homebuilders who will be selling more cars and homes.


Source: Flickr / pdz_house.

But, there's more. If more people can buy new homes, retailers like Home Depot and Lowes will sell more building materials. Insurance companies will sell more homeowners' insurance. Roofers, plumbers, and electricians will all have more business. This is not to mention how the employees of these companies will have more work and earn more money to spend at other businesses.

When people buy more new cars, the railroads and other transportation companies will have more cargo to haul. Companies that produce the stereos, alarm systems, navigation systems, and other electronics for the car manufacturers will make more money. Governments will collect more taxes from the sale of more new vehicles, which could then be spent to fund more public sector jobs.

How it will affect your bottom line
As a consumer, you could start to qualify for loans and credit cards that you couldn't before, and you might start to get offers of lower interest rates than you have been seeing.

As an investor, this should help the overall economic recovery in the United States, but there are a few sectors that should especially benefit from easier credit. The banking, automotive, and homebuilding industries will gain the most, but looser lending standards should positively affect the entire market, provided the banks learned their lesson from the financial crisis and know when to say "no".

The best way to invest in banking
Do you hate your bank? If you're like most Americans, chances are good that you answered yes to that question. While that's not great news for consumers, it certainly creates opportunity for savvy investors. That's because there's a brand-new company that's revolutionizing banking, and is poised to kill the hated traditional brick-and-mortar banking model. And amazingly, despite its rapid growth, this company is still flying under the radar of Wall Street. To learn about about this company, click here to access our new special free report.

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information

Compare Brokers